5J to fly Australia in February 2014

Also Seeks Moscow entitlements

February 28, 2013

Cebu Pacific (CEB) is seeking the Civil Aeronautics Board’s (CAB) approval to fly Sydney and Melbourne in Australia from Manila, and to Moscow in Russia by 2014.

The airline intends to offer daily services to Australia using Airbus A330s starting February 2014 and is asking for additional seat entitlements to the land down under.

CEB is requesting permission to fly between Manila and Sydney every Monday, Wednesday, and Friday, the available slots from existing bilateral. It also wants to offer flights between Sydney and Manila every Tuesday, Thursday, and Saturday which require amendments of existing Air Services Agreement between Australia and the Philippines. The airline is also looking to fly from Manila to Melbourne every Tuesday and Saturday and from Melbourne to Manila every Wednesday and Sunday.

It also asked CAB to give the Russian Federation entitlements to Moscow for it to launch Manila-Moscow route. CEB intends to fly between Manila and Moscow 4 times a week with an A330 aircraft. Philippine Airlines is also seeking Russian entitlements to Moscow.

Laguindingan Airport to Open April 2013

February 27, 2013

President Benigno S. Aquino III visited Tuesday the ongoing construction of the ₱7.9 billion Laguindingan Airport that has projected passenger capacity of 1.6 million.

DOTC Secretary Joseph Abaya told the President in a briefing that the airport project will be operational on April 30 this year and the Civil Aviation Authority of the Philippines (CAAP) is restructuring flight arrival times without the Instrument Landing System (ILS) which are yet to be installed.

The A330-capable Laguindingan Airport boast two boarding bridges and five aircraft parking bays.

President Aquino said that he is already looking into expansion of the airport before its planned opening since the airport capacity has already been breached based on the figures recorded by Lumbia airport.

Land acquisition project started in 1988 during the leadership of the first Aquino administration when the Ayala's agreed to sell their land for the airport but construction hasn’t materialized until 20 years later when it was conceptualized.
(Photos by: Rolando Mailo/ Malacañang Photo Bureau)

CAAP Fails ICAO Audit Again, but

DOTC Secretary Says Otherwise

February 23,2013

The Civil Aviation Authority of the Philippines (CAAP) failed to pass anew the audit of the International Civil Aviation Organization (ICAO) conducted from Feb. 18 to 22.

The ICAO Coordinated Validated Mission (ICVM) team delivered the bad news yesterday during a post-audit exit briefing attended by top CAAP and Department of Transportation and Communications (DOTC) officials.

But DOTC Secretary Joseph Emilio Abaya said Saturday that CAAP passed the audit and that the team was actually going to recommend to ICAO headquarters in Montreal, the lifting of the Significant Safety Concerns issued to the Philippines.

“The ICAO official announcement on the lifting of the SSCs is expected to be made within two to three weeks’ time,” Abaya said in a statement.

With ICAO’s upgrade, the country “can now focus on regaining the Federal Aviation Administration (FAA) Category 1 rating,”  the statement adds.

Malacanang spokesperson Abigail Valte echoed Abaya's position saying ICAO validation team even recommended that the restrictions on the Philippines be lifted.

“The CAAP has successfully addressed all safety concern(s). We feel duty bound to correct the newspaper report because of the negative impact this inaccurate story will have on aviation,” she said this afternoon when interviewed over dzRB Radyo ng Bayan.

Secretive Lal-lo Airport Exposed

Is 1.6 Billion not enough to build an airport?

February 22, 2013

The Philippines most secret 1.6 Billion Pesos airport project developed by Cagayan Economic Zone Authority (CEZA) and the private consortium Cagayan Land Property Development Corp.(CLPDC) was exposed yesterday with no less than Senate President Juan Ponce Enrile using the airport amidst Port Irene Used-auto import scandal.

It was designed to be a private world-class airport rising in the home province of Senate President Enrile but its public nature of the grant, makes it a government airport, supposedly scheduled for opening in 2010.

Fast Forward in 2013, it still has to be completed with CEZA looking for the additional funds for its completion. To do that they have to sell the airport as hangars for private planes of jet-setting billionaires and executives of top corporations in Asia, particularly in Hongkong

The Philippine Daily Inquirer ran a story yesterday to put it this wise:

Alfonso Cusi, former chief of the Civil Aviation Authority of the Philipiness and general manager of the Philippine Ports Authority during the Arroyo administration, revealed that he was brokering a deal for the entry of a foreign business group to develop the international airport in Lal-lo, Cagayan, as a cheaper alternative for private jets currently docking at the airports in Hong Kong, Macau, Guangzhou and Shenzhen in China.

“I’m not supposed to divulge details of the project at this point because there are other airports looking to get this lucrative business. There’s a very strong interest outside of the Philippines to set up a venture similar to what we are rolling out at Lal-lo. We’re still finalizing the deal, but we’re confident we will get it,” Cusi said in a phone interview.

Cusi said he was forced to reveal the plans for the Lal-lo airport to explain the presence of Enrile during the initial testing on Tuesday of its 46-meter-wide, 2,200-meter-long runway.

“He was there to witness the progress in the airport which is a key component of the Cagayan Export Zone. But he is not part of the business group investing in the hangar, it’s all foreign,” he said.

The question now is where did the US$34 million went?

Airport feasibility funding was derived from the Spanish government in 2007 providing grant assistance to the Philippines.

Cagayan Economic Zone Authority (CEZA) applied for a technical assistance grant offered by the Spanish FEV (Linea de Financiacion de Estudios de Viabilidad) for the conduct of feasibility study, master planning and preliminary engineering design for an international airport in Cagayan. The grant was approved on Jan. 22, 2009.

Thereafter, a shortlist of qualified Spanish companies to undertake the planning and study — which included the master planning and design of the international airport — was forwarded to Ceza by the Spanish Embassy.

Getinsa Ingenieria SL, a Madrid-based engineering firm, submitted the best proposal to Ceza and was awarded the contract after a letter of “no objection” was received from the Spanish government.

Getinsa conduct studies and engineering projects worldwide and has business office in Manila working as consultant for the World Bank in the Philippines.

In September 2009, CEZA and the private consortium Cagayan Land Property Development Corp.(CLPDC) signed the 50-year joint venture agreement to put up the international airport in Barangays San Mariano and Dagupan, Lallo town.

Enrile expects President Aquino to inaugurate the $34.2-million northern Luzon gateway, which would have a paved apron and tarmac, a control tower and a 1,000-square-meter terminal building, Cusi said.

Yet, it never was completed according to plan.

Emirates to fly Clark

Begins Flight October 1

February 18, 2013

Emirates Airlines announced that it will begin daily flights between Dubai and and Manila-Clark starting October 1 2013 using Boeing 777-300ER aircraft.

Emirates flight EK338 will depart Dubai at about 4 am and arrive at Clark International Airport at 4:40 pm. The return flight, EK339 will depart at 6:35 pm and arrive at Dubai International Airport at 11:05 pm.

The airline operates 3 daily flight out of NAIA and has been operating in the country since 1990.

“The launch of flights between Clark International Airport and Dubai will offer our passengers the flexibility of choosing from two destinations in the Philippines,” said Tim Clark, President Emirates Airline in a statement on Monday, February 18.

The new route also allows Emirates SkyCargo to provide more than 160 tonnes of additional cargo hold capacity each way per week, further supporting Philippines exports of perishables, such as dairy products, fruit and vegetables, meat, seafood and electrical and electronic equipment, and its imports of textiles, apparel, plants, flowers and chemical products.

Busuanga comes to Jet Age

Also Flies Virac April 2 

February 16, 2013
Full service carrier Skyjet Airlines expanded routes to Busuanga Friday after introducing Basco with flights leaving Ninoy Aquino International Airport (NAIA) terminal 4 at 9:20 a.m. every Monday, Wednesday and Friday arriving Busuanga at around 10 a.m. Return flights leave at 11:20 a.m. and arriving in Manila at 12:05 noon time.

Busuanga is the gateway to Coron, the largest island in the Calamian Group in Palawan, where the Calauit Game Preserve and Wildlife Sanctuary is located.

"With the introduction today of Skyjet Airlines, we enter today's growing leisure travel market on a truly competitive basis, call it boutique or leisure premium airline, a cross between a low-cost carrier and a legacy carrier," said Skyjet CEO Dr. Joel Mendoza.

Skyjet airline offers free snacks with free five kilos on hand carried luggage and 10 kilos for accompanied luggage.

The airlines operates a fleet of two 94-seater, 4-engine BAE 146-200 jets.

BAE 146 jets are designed for short landings and takeoffs, allowing it to use smaller airports in the country.

“We focus on safety," Mendoza said. "Our aircraft can operate in the most challenging runways and weather conditions in the Philippines as certified by the Civil Aviation Authority of the Philippines (CAAP)".

Starting April 2, 2013 it will mount thrice weekly flights to Virac, Catanduanes every Tuesday, Thursdays, and Saturdays which is the backdoor to Caramoan, the top tourism destination in Camarines Sur.

By June, Mendoza said that they will start accepting charter accommodations from Batanes to Taiwan especially to Kaoshiung, which is only around 150 nautical miles from Batanes, and Orchid Island, where the native people in the area resemble and and even speak the local Ivatan (Batanes) language.

PZL-Świdnik Completes Sokol Delivery to PAF

February 16, 2013

AgustaWestland subsidiary PZL-Swidnik, delivered to the Philippines Friday the last two batch of eight Sokol helicopters ordered for the Philippine Air Force. The last remaining Sokols were transported from Lublin Airport to Clark Air Base on board an An-124 Ruslan cargo plane.

“It gives me a great pleasure to complete the handover of the Sokol helicopters produced in Świdnik to the customer. The delivery from Lublin Airport is an important milestone and for sure in the future we’ll cooperate further with Lublin Airport in connection with PZL-Świdnik operations”, said Nicola Bianco, Managing Director, PZL-Świdnik S.A.

Sokol helicopters proved to be highly effective and reliable helicopters for the Philippine Air Force capable of operating in the most demanding conditions. The helicopters are being flown by pilots trained at the PZL-Świdnik factory. Two of the units are being assigned to the elite Presidential Security Group.

“I’m pleased that the excellent operational capabilities of the Sokols are greatly appreciated by the Philippine Air Force. I look forward to expanding our close partnership with the customer in the future providing technical support and ongoing operational support for the Sokols”, added Mieczysław Majewski, President of PZL-Świdnik’s Management Board.

The Philippine Air Force’s Sokols are equipped with the latest navigation and avionics systems including 4-axis autopilot, EFIS system and Night Vision Goggle compatible cockpit, allowing to operate day and night in all weather conditions. This 6-tonne class helicopter can transport up to 11 troops in the cabin or can lift up to 2,100 kg (4,630 lb) using its external cargo hook. Powered by two engines, each with the take-off power of 662 kW (888 shp), the Sokols reach the maximum speed of 260 km/h (140 knots), can fly 734 km (402 nm) or stay airborne for over 4 hours using its standard fuel tanks.

Sokol delivery flight to the Philippines below

Load Factor Blamed for PAL Domestic Consolidation

Air Asia bleeds hard and Airphil Express quits Clark hub

February 15, 2013

Slipping load factor has been blamed for Philippine Airlines (PAL) consolidation of its domestic route network with low cost subsidiary Airphil Express despite robust 9.6% growth in the domestic  market due to overcapacity of seats introduce by competing airlines.

Data from the Civil Aeronautics Board (CAB) disclosed that passenger traffic rose 9.6 percent in 2012, but the six major airlines reported a seat capacity increase of 16.14 percent equivalent to 28.27 million as compared to 24.34 million in 2011. 

The increase in seats is more than 6 percent of the demand creating an unprofitable lower load factor of all domestic airlines which now averaged around 64.85 percent, down from a better 75.69 percent load in 2011.

Data from the Civil Aeronautics Board (CAB) showed that the number of domestic passengers rose by 9.6 percent to 20.56 million last year from 18.77 million in 2011.

Leading LCC Cebu Pacific (CEB) carried 9.48 million passengers in 2012, up 11.8 percent from 8.47 million in 2011. Its load factor, however, fell to 77.22 percent from 80.68 percent recorded in 2011.

Similarly, Philippine Airlines (PAL) flew 4.09 million passengers, down 4.9 percent from 4.31 million in 2011. The flag carrier's load factor also dropped to 71.76 percent from 74.52 percent.

PAL budget unit Airphil Express registered increase passenger numbers as it flew 4.45 million higher than the 3.69 million in 2011. Its load factor however dropped to 71 .26 percent from 74.17 percent.

Meanwhile, Zest Airways carried 2.06 million passengers, down from 2.15 million passengers in 2011. Its load factor fell sharply to 65.64 percent from 74.26 percent.

Southeast Asian Airlines (Seair) grew its passenger as it flew 317,897 this year from 124,468 in 2011. Its load factor likewise fell sharply to 58.80 percent from 74.85 percent in 2011.

It is all bad news for Air Asia Philippines carrying only 158,519 passengers last year amidst a load factor of 44.48 percent.

Over-capacity and irrational competition has been blamed for budget airline losses in the Philippines except market leader Cebu Pacific which continue to register profit despite intense competition.

Philippine Airlines consolidated its domestic operation with Airphil Express in 2012 to cut losses. Air Asia pulled the plug in Puerto Princesa and reduce services to Kalibo and Davao.Zest airways cancelled some domestic destinations while Cebu Pacific reduces frequency on some routes.

The latest event is Airphil Express pulling out of Clark effective February 22 stopping all domestic and international flights south of Manila citing heavy losses. Airphil Express made Clark its hub in March 2012 as it flies to Hongkong and Singapore, as well as to Cebu, Kalibo, Davao and Puerto Princesa.

Terminal 3 Gets Funding Boost

Gov't injects $45 Million to Complete and Expand Terminal

February 13, 2013

The Government of the Philippines has forged a $45-million deal with Japanese contractor Takenaka Corp. to complete the rehabilitation of the 182,500-square meter Terminal 3 of Ninoy Aquino International Airport.  

Takaneka is to complete delivery of 23 airport systems, which include baggage handling and reconciliation system, flight information display system, building management system, local area network, fire alarm and protection system and passenger loading bridges.

Upon full completion, the new terminal will have 34 operating air bridges and 20 contact gates, allowing it to service 28 aircraft simultaneously. It would also have the capacity to service up to 6,000 passengers per hour, or 33,000 passengers daily at peak time. 

The NAIA terminal 3 is expected to be fully operation by the end of 2013.

Mactan Grew 8%

February 12, 2013

Mactan-Cebu International Airport registered 6.77 million last year as it grew 8.22% to 6.22 million reported a year earlier. Domestic passenger movement went up by 10.53% to 5.25 million from 4.75 million in 2011. International passenger volume gone up by 2.03% to 1.51 million last year from 1.48 million a year ago.

New Airline?

February 11, 2013

Airphil Express unveils new addition to its Q300 fleet, ex ANA, thus the livery. Thanks to Taishi Tamura

Airphil Flies Sandakan April 22

Connects flight to Cebu

February 10, 2013

Airphil Express will fly Zamboanga-Sandakan and Vice Versa three times a week every Monday, Wednesday and Friday starting April 22, 2013 with Q400. It will depart Zamboanga at 12:50pm arriving Sandakan 2:00pm. Return Flight is scheduled at 2:40pm arriving Zamboanga at 3:50pm.

Transfer of Private Planes To Sangley Set

February 9, 2013

By Kris Bayos

MANILA, Philippines --- There will be no more private aircraft operating in the Ninoy Aquino International Airport (NAIA) Complex by 2015 as the government gradually transfers their operations to Sangley Airport in Cavite City, airport authorities said on Friday.

Manila International Airport Authority (MIAA) general manager Jose Angel Honrado confirmed the statement of Transportation Secretary Joseph Emilio Abaya, saying private planes will vacate hangars inside the crowded NAIA complex and no longer compete for the usage of the in-demand NAIA runways together with big aircraft.

Honrado said the transfer of the general aviation services to Sangley Airport in Cavite is expected for completion by 2015.

“We plan to transfer the general aviation to Sangley and it will be completed by 2015,” he said.

But Honrado, in a previous interview, said the transfer of general aviation to Sangley in Cavite will only commence with the completion and operation of Laguindingan Airport in Misamis Oriental to
accommodate the commercial flights in Cagayan de Oro Airport.

This is because the Philippine Air Force (PAF) will have to move to Cagayan de Oro Airport to free up its airbase in Sangley, Cavite City, which will in turn accommodate the general aviation services that will move out of NAIA.

“It will be a sequential movement,” Honrado said.

The official said the sequential movement of the general aviation services to the PAF base in Sangley was already approved by the Department of National Defense in a memorandum of agreement that it forged with the Department of Transportation and Communications.

The diversion of general aviation services away from NAIA is the Aquino Administration’s solution to decongest the jampacked complex, which caters to domestic and international flights, chartered private flights and even fish runs, which transport fresh sea products using light aircraft.

According to the MIAA, the general aviation space and hangars occupy at least 44 hectares within NAIA. These services include air charter, air cargo, aviation training, aircraft maintenance and corporate flight operations. The area was leased by MIAA under its mandate.

Fish runs have already moved operations to Sangley since May and the runway use of general aviation services as well as flying schools was already limited to off-peak hours to reduce the demand.  Honrado said he was given word that flying schools operating within NAIA will be moving to different locations starting 2013.

Honrado said the sequential movement requirement of the general aviation services is causing procedural delay in the decongestion of NAIA.

“But we see still the complete movement of the general aviation, flying schools, and fish runs out of NAIA within the term of President Aquino,” Honrado said, referring to May 2016, when the President’s six-year term ends.

Last July, former Transportation Secretary Manuel Roxas said about 90 percent of Laguindingan Airport’s civil works have been completed by the South Korea-based Yooshin Engineering Corp., the SCHEMA Konsult, Inc., and the Hanjin Heavy Industries and Construction Co. Ltd.

However, the Public-Private Partnership (PPP) Center has yet to bid out operation and maintenance of the airport facility.

Airphil Flies Basco

Airphil Express has announce flight to Basco, Batanes starting May 1, 2013 and will fly thrice weekly.  APX flights will depart NAIA Terminal 3 every Mondays, Wednesdays, and Fridays at 5:05AM, arriving Basco at 6:50AM. Return flights will be on the same days, departing Basco at 8:40AM, arriving Manila at 10:20am. 

Airlines and Airports

Anatomy of Monopoly and Market Power

February 1, 2013

Tomás Serebrisky
The Transport Department has initially barred diversified conglomerate San Miguel Corp. (SMC) that operates Philippines Airlines (PAL) and JG Summit Holdings, owner of Cebu Pacific (CEB) from joining the 17 billion Pesos public bidding for the construction of Mactan Cebu International Airport Terminal 2 and operation of both terminals on Anti-trust concerns.

An emerging issue in privatized infrastructure sectors is how regulators should deal with proposed mergers that could potentially increase market power and lead to anti-competitive behavior. This Note looks at the issues in the airport sector, focusing on Argentina—the first developing country to confront a vertical merger in a deregulated air transport market.

In the late 1980s and the 1990s many countries privatized airports or concessioned their operation. The United Kingdom began the trend, followed by other countries adopting new forms of infrastructure ownership and management. To control infrastructure licensing and the “natural monopoly” characteristics of some airport services, governments developed regulatory policies for airport systems.

The operation of an airport creates incentives to transfer the airport’s market power to the air transport market. If the airport market is regulated but the airport operator is allowed to control at least one airline, those incentives can give rise to anti-competitive practices aimed at displacing competing airlines.

When the regulatory framework for airports lacks explicit rules about such vertical integration, that can have consequences for competition in the air transport market. Australia and Chile, for example, have an explicit prohibition on vertical integration. By contrast, Argentina has no restrictions on vertical integration, leaving it to the antitrust agency to decide whether to approve or reject a vertical merger.

The airport business and the vertical merger problem Airlines provide air transport services by combining aircraft, personnel, airport services, and other inputs. Airports supply a series of services to air transport companies and to passengers:
  • Aeronautical services (rescue, security, firefighting,infrastructure supply, runway and taxiway maintenance).
  • Aeronautical-related commercial services (catering; supply of fuel and lubricants; baggage, passenger, and aircraft assistance).
  • Commercial services (banks, hotels, restaurants,car rental, car parking, retail shops, duty-free shops).

A vertical relationship between airlines (downstream) and airports (upstream) can be problematic. Airports provide the “entry point” into the air transport network, through terminals and runways. Thus for the air transport market to be competitive, airlines must have access to airports.

In the airport sector it is usually more efficient to have a single airport supplying a given volume of traffic.1 The reason is that airports have large economies of scale: the unit costs of infrastructure supply fall as airport traffic increases, because of the high fixed costs of capital and of infrastructure and equipment maintenance. This situation implies a market configuration with a monopolist airport operator upstream and with passenger and freight air transport companies downstream operating in a
competitive market.

If access to airports and tariffs for airport services are not regulated, airport operators have no incentives to pursue vertical integration. The operators can set tariffs high enough to seize all the rents generated in the competitive segment of the market. But in most countries that have concessioned airport services, tariffs and access rules are set by a regulatory agency.2

A merger rejected, then allowed Argentina concessioned 33 airports as a group in 2000. By the end of 2001 the concessionaire, the airport system operator Aeropuertos Argentina 2000 (AA2000), announced plans to acquire LAPA, the country’s second largest airline by volume of passengers. This vertical integration would have been the first case of an airport concessionaire operating an airline in a deregulated market. After a comprehensive and detailed analysis, the Argentine Antitrust Commission rejected the merger. It based its decision on the anticompetitive practices that the airport operator could potentially use to raise rival airlines’ costs and exclude them from the air transport market. The ruling and its aftermath may have relevance in other countries.

The Argentine Antitrust Commission, in its ruling, surveyed the set of practices that the airport operator, if merged with an airline, could use to affect competition in the airline market:

Diminution of quality. The operator could reduce the quality of services rival airlines can offer through its allocation of check-in space, seats in gate areas, VIP lounges, and office space.

Discrimination in access to ground handling services. If the operator controls the supply of ground handling services (baggage, passenger, and aircraft assistance)—as AA2000 will for foreign airlines starting in 2009 unless they opt to self-handle—it could restrict the access of competing airlines to their supply.

Increases in transaction costs. The operator could increase costs for competing airlines, such as through “administrative norms” on access to the airport.

Predatory practices using cross-subsidies. Using income from the airport market as a source of cross-subsidies, the operator could reduce the tariffs for its airline below the (competitive) market cost, undermining the profitability of competing airlines. Its ability to do so would depend on the ability of the regulator, but the information asymmetries between regulators and operators (a problem in all regulated industries but more significant in developing countries) leave many openings for hidden
price discounts.

Evasion of tariff regulation. Because the price elasticity of demand for aeronautical services is low, the operator would have an incentive to distort tariff regulation in order to increase the regulated prices. With cost-plus tariff regulation, the operator could intentionally increase its costs to raise airport tariffs, increasing costs for competing airlines. With price cap tariff regulation (as in Argentina and Australia), the operator might try to persuade the regulator to reduce the productivity adjustment factor X. That would lead to a smaller reduction in tariffs when they are revised and thus have an adverse effect on the costs of competing airlines.

This ruling took more than a year for the Argentine Antitrust Commission to complete, compared with an average of less than four months for mergers across all sectors. The agency had to rely on partial information because AA2000 and LAPA were reluctant to provide the information required. As the agency’s ruling explains, airline executives who testified as witnesses reported many instances of actual and potential anticompetitive behavior by the airport operator after it announced the merger. The uncertainties airlines faced and the resources the antitrust agency devoted to the merger ruling constitute significant costs. Another cost that will have an impact in the short run, and possibly the long run as well, is damage to the reputation of the antitrust institutions. Causing the damage was a decision by the secretary of competition and consumer affairs, who has the power to modify the Antitrust Commission’s rulings, to overturn the agency’s ruling (though it required the airport operator to reduce its shareholding in LAPA to a minority interest). This decision shows a willingness to interfere politically in the decisions of the antitrust agency, creating a problematic precedent.

Lessons and solutions for other countries 
DOTC allows Airlines and airline-related entities to bid in the airport project in a disclosure Friday, but maintains that they cannot be directly involved in the entity that will eventually operate the Mactan-Cebu airport. Transport Secretary Joseph Abaya said the parent company of commercial airlines can only own up to 33% of the shares in the winning consortium.
Most countries bringing the private sector into the management of airports have no explicit provisions on vertical integration in the air transport market. But some countries, such as Australia and Chile, recognized the need to establish explicit rules against vertical integration. Australia limits an airport operator’s ownership stake in an airline to 5 percent and explicitly prohibits vertical integration between an airport operator and air transport companies.3 In Chile the bidding guidelines for airport concessions specify that the infrastructure concessionaire cannot have decisive influence over the administration or management of companies (domestic or international) offering air transport services (Chile, Department of Public Works 1997). Although the private sector does not have a significant role in the airport sector in continental Europe, the European Commission also recognized the potential problems of vertical integration in its analysis of the proposed merger between Air France and Sabena (European Commission 1992, p. 9).

Policy options for addressing potential anticompetitive practices in the air transport market fall into two main categories:

▪ Vertical integration with regulation of conduct.
The regulated company (the airport) is allowed to operate competitively in competitive (nonregulated) segments, but restrictions are imposed on its conduct as a vertically integrated entity.

▪ Vertical separation. The company that operates in a regulated market segment is not allowed to participate in the competitive segment.

Vertical integration with regulation of conduct
Regulation of conduct can be ex ante or ex post. Ex ante regulation uses two types of instruments:
open access and accounting separation.

Open access policies compel the operators of “bottleneck” infrastructure (essential infrastructure such as an airport) to offer access to all firms at reasonable prices. Such policies are aimed at preventing “refusal to deal,” but on their own they cannot prevent access discrimination.
Operators can effectively discriminate by resorting to factors other than price (such as through quality discrimination).

Accounting separation regulations require vertically integrated companies to separate the accounting of each company under their control. This compels a vertically integrated company to establish a price for each airport service it offers and to use these prices as transfer prices among the companies it controls. The transfer prices must be the same as those the airport operator offers every other airline in the market.

Accounting separation is aimed at preventing price discrimination and cross-subsidies between airport and air transport services. It cannot prevent other kinds of discrimination and must be complemented by open access regulation to prevent restrictions on airport access.

Where only ex post regulations are used, the integrated company (airport operator and airline) will be subject to the general antitrust laws. To ensure that the antitrust agency can enforce these laws effectively, rules must be established requiring information on the aeronautical services market to be made publicly available.

Vertical separation
Vertical separation of the airport operation from the air transport market bars a company from simultaneously controlling the airport operator and companies that operate in the (nonregulated) air transport market.

Vertical separation offers benefits because it prevents monopolistic practices by the airport operator aimed at displacing competing airlines in the nonregulated air transport market. Vertical integration also offers benefits, in the form of efficiencies in infrastructure development: airlines have ample information on trends in air traffic demand that is needed to plan infrastructure investment. But with an adequate regulatory framework for infrastructure development, these benefits can be obtained
without vertical integration.

Regulation of market structure—or vertical separation—offers advantages over regulation of conduct when the costs of anticompetitive behavior are very high (adversely affecting the general economic welfare) and the corrective actions needed are very difficult to carry out.4 Structural regulation also offers the advantage of low monitoring costs, while conduct regulation requires constant supervision by sophisticated regulators. For developing countries with weak institutions and limited antitrust
experience, structural regulation thus appears to be more attractive. The Argentine case illustrates the costs of not imposing structural regulation.

Regulating vertically integrated companies (through rules requiring open access and accounting separation) and imposing vertical separation are the least costly instruments for ensuring competition in the commercial aviation market. But to ensure that open access and accounting separation rules are effective, the sector regulator or antitrust agency must have a good information system.

International experience, including the recent ruling by the Argentine antitrust agency, suggests that developing countries designing airport concessions should include an explicit prohibition on vertical integration (or impose vertical separation) between the airport operator and airlines. This regulatory approach has several major advantages: it keeps the costs of monitoring and information gathering low, eliminates the incentives to transfer market power to the transport sector, reduces conflicts between the regulatory agency and the antitrust agency, and provides certainty to airlines.

The author would like to thank Pablo Presso for joint research in this area and Antonio Estache for comments.
1. Airports are natural monopolies in most cities given the current demand for air transport. Some markets sustain more than one airport (London, New York, San Francisco), but they are the exceptions.

2. New Zealand is one country that does not regulate private airport operators, allowing them to freely set rates for the services they provide.

3. Airports Act 1996 (see http://www.scaletext.law.gov.au).

4. Requiring vertically integrated firms to disinvest may be advisable. But enforcing this action is time consuming and requires a state that can resist private sector

Australian Competition and Consumer Commission.1997. “Declaration of Airport Services: Section 192 of the Airports Act.” Draft Discussion Paper (December).Canberra.
Chile, Department of Public Works. 1997. Bases de Licitación, “Concesión Aeropuerto Internacional Arturo Merino Benítez de Santiago.” Santiago.
Crocioni, Pietro. 2000. “Defining Airline Markets: A Comparison of the U.S. and EU Experiences.” Antitrust Bulletin 45(spring): 1–45.
Doganis, Rigas. 2001. The Airlines Business in the 21st Century. London: Routledge.

Estache, Antonio, and Ginés de Rus, eds. 2000. Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators. Washington, D.C.:World Bank.
European Commission. 1992. Air France–Sabena IV/M 157. [http://europa.eu.int/comm/competition/mergers/ cases/decisions/m157_fr.pdf].

FIEL (Latin American Economic Research Foundation). 1999. La Regulación de la Competencia y de los Servicios Públicos. Teoría y Experiencia Argentina Reciente. Buenos Aires.